See accompanying notes to the condensed consolidated financial
statements.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
SEPTEMBER 30, 2018
(Expressed in U.S. dollars)
(UNAUDITED)
NOTE 1 – BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT
ACCOUNTING POLICIES
(a) Basis
of Presentation and Consolidation
The accompanying condensed financial statements
have been prepared by Gulf Resources, Inc., (“Gulf Resources”) a Nevada corporation and its subsidiaries (collectively,
the “Company”), in accordance with the instructions to Form 10-Q and, therefore, do not necessarily include all information
and footnotes necessary for a fair statement of its financial position, results of operations and cash flows in accordance with
accounting principles generally accepted in the United States (“US GAAP”).
In the opinion of management, the unaudited
financial information for the three and nine months ended September 30, 2018 presented reflects all adjustments, which are only
normal and recurring, necessary for a fair statement of results of operations, financial position and cash flows. These condensed
financial statements should be read in conjunction with the financial statements included in the Company’s 2017
Form 10-K, as amended. Operating results for the interim periods are not necessarily indicative of operating results for an entire
fiscal year.
The preparation of financial statements
in conformity with US GAAP requires management to make estimates and assumptions that affect the amounts that are reported in the
financial statements and accompanying disclosures. Although these estimates are based on management’s best knowledge of current
events and actions that the Company may undertake in the future, actual results may be different from the estimates. The Company
also exercises judgments in the preparation of these condensed financial statements in certain areas, including classification
of leases and related party transactions.
On September 2, 2016, the Company announced the planned merger
of two of its 100% owned subsidiaries, Shouguan Yuxin Chemical Co., Limited (“SYCI”) and Shouguan Rongyuan Chemical
Co., Ltd (“SCRC”). On March 24, 2017, the legal process of the merger was completed and SCRC was officially deregistered
on March 28, 2017. The results of these two subsidiaries were reported as SYCI in the three and nine months ended September 30,
2018.
The consolidated financial statements include
the accounts of Gulf Resources, Inc. and its wholly-owned subsidiary, Upper Class Group Limited, a company incorporated in the
British Virgin Islands, which owns 100% of Hong Kong Jiaxing Industrial Limited, a company incorporated in Hong Kong (“HKJI”).
HKJI owns 100% of Shouguang City Haoyuan Chemical Company Limited ("SCHC") which owns 100% of Shouguang Yuxin Chemical
Industry Co., Limited (“SYCI”) and Daying County Haoyuan Chemical Company Limited (“DCHC”). All
material intercompany transactions have been eliminated on consolidation.
(b) Nature
of the Business
The Company manufactures and trades bromine
and crude salt through its wholly-owned subsidiary, Shouguang City Haoyuan Chemical Company Limited ("SCHC") and manufactures
chemical products for use in the oil industry, pesticides, paper manufacturing industry and for human and animal antibiotics through
its wholly-owned subsidiary, Shouguang Yuxin Chemical Industry Co., Limited ("SYCI") in the People’s Republic of
China (“PRC”). DCHC was established to further explore and develop natural gas and brine resources (including bromine
and crude salt) in the PRC. DCHC’s business was not fully operational as of September 30, 2018.
On September 1, 2017, the Company received
notification from the Government of Yangkou County, Shouguang City of PRC that production at all its factories should be halted
with immediate effect in order for the Company to perform rectification and improvement in accordance with the county’s new
safety and environmental protection requirements.
The Company has been working closely with
the county authorities to develop rectification plans for both its bromine and crude salt businesses and agreed on a plan in October
2017. SCHC is currently under rectification process. The Company believes this rectification process will cost approximately $35
million. In the nine months ended September 30, 2018, the Company incurred $10,189,269 in the rectification and improvements of
plant and equipment of the bromine and crude salt factories resulting in a cumulative amount of $28,127,921 incurred as of September
30, 2018.
In addition to the remaining $7 million
to be incurred for the rectification and improvement of plant and equipment of the bromine and crude salt factories, the Company
expects to enter into contracts related to the enhancement of the extraction wells amounting to a total of approximately $40 million.
Originally, six bromine factories completed
their rectification process within factory areas (i.e. excluding crude salt field area) and were approved and scheduled for production
commencement by April 2018 as verbally indicated by the local government. Subsequently, the Shandong Provincial government required
the local government to conduct “four rating and one comprehensive evaluation” for all of the chemical companies within
its jurisdiction. This has delayed the production commencement schedule of the six bromine and crude salt factories. As of the
date of this report, the Company has not received any official approval from the government.
Subsequently on June 29 2018, the Company
received a formal notice (dated June 25, 2018) jointly issued by various provincial government agencies in Shandong Province (the
“Notice”) forwarded by the Weifang City Special Operations Leading Group Office of Safe Production, Transformation
and Upgrading of Chemical Industry. In the Notice, the provincial government agencies set forth further requirements and procedures
covering the following four aspects for the chemical industrial enterprises: project approval, planning approval, land use rights
approval and environmental protection assessment approval. Those standards and procedures apply to all chemical industrial enterprises
in Shandong Province including the Company’s bromine plants that have not completed project approval procedures, planning
approval procedures, land use rights approval procedures and environmental protection assessment procedures. The Company believes
that the government will not grant approval to the Company to allow its bromine and crude salt plants to resume operations until
the Company has fully complied with the aforesaid rules set forth in the Notice.
The Shouguang City Bromine Association,
on behalf of all the bromine plants in Shouguang, has started discussions with the local government agencies. The local governmental
agencies confirmed the facts that their initial requirements for the bromine industry did not include the project approval, the
planning approval and the land use rights approval and that those three additional approvals were new requirements of the provincial
government. The Company understood from the local government that it has been coordinating with several government agencies to
solve these three outstanding approval issues in a timely manner and that all the affected bromine plants are not allowed to commence
production prior to obtaining those approvals.
The Company is not certain how long the
temporary delay will be due to the issuance and implement of the Notice. The Company believes that this is another step by the
government to improve the environment. It further believes the goal of the government is not to close all plants, but rather to
codify the regulations related to project approval, land use, planning approval and environmental protection assessment approval
so that illegal plants are not able to open in the future and so that plants close to population centers do not cause serious environmental
damage. In addition, the Company believes that the Shandong provincial government wants to assure that each of its regional and
county governments has applied the Notice in a consistent manner.
On September 21, 2018, the Company received
a closing notice from the People's Government of Yangkou Town, Shouguang City informing it to close its three bromine factories
(Number 3, Number 4, and Number 11.). The crude salt fields surrounding these factories have been reclaimed as cultivated or construction
land and hence did not meet the requirement for bromine and crude salt co-production set by the relevant authority. In closing
these factories, the Company wrote off net book value of these factories’ property, plant and equipment in the amount of
$18,644,473 in the loss on demolition of factory in the condensed consolidated statements of income for the three and nine-month
periods ended September 30, 2018, recorded an impairment loss on the related mineral rights of these three factories of $1,284,832
in the condensed consolidated statements of income for the three and nine-month periods ended September 30, 2018 and wrote off
$52,926 of prepaid land lease recorded in other operating loss in the condensed consolidated statements of income for the three
and nine-month periods ended September 30, 2018. The Company estimated the dismantling fees to be approximately $0.29 million.
The Company will negotiate with the local villages over compensation for the payment already made for these land leases and mineral
rights in the past. However, the Company is uncertain of the amount that it could recover and the timing when this would be accomplished.
The Company believes the issues related
to crude salt and bromine at the remaining factories are almost resolved. While it still needs approvals for project approval,
planning approval, land use rights approval and environmental protection assessment approval, the local government is actively
working with us. Six of our factories previously passed inspections.
On November 24, 2017, the Company received
a letter from the Government of Yangkou County, Shouguang City notifying the Company to relocate its two chemical production plants
located in the second living area of the Qinghe Oil Extraction Plant to the Bohai Marine Fine Chemical Industrial Park (“Bohai
Park”). This is because the two plants are located in a residential area and their production activities will impact the
living environment of the residents. This is as a result of the country’s effort to improve the development of the chemical
industry, manage safe production and curb environmental pollution accidents effectively, and ensure the quality of the living environment
of residents. All chemical enterprises which do not comply with the requirements of the safety and environmental protection regulations
will be ordered to shut down. The Company believes this relocation process will cost approximately $60 million in total. The
Company incurred relocation cost in the amount of $10,925,081 and $9,732,118 as of September 30, 2018 and December 31, 2017 and
estimated that the new factory will be fully operational by the beginning of 2020.
The Company does not anticipate that the
Company’s new chemical factory will be significantly impacted by the Notice. The Company has secured from the government
the land use rights for its chemical plants located at the Bohai Marine Fine Chemical Industry Park and presented a completed construction
design draft and other related documents to the local authorities for approval. The Company expected to receive feedback from the
local authorities. However, the Company does believe there could be a delay for the approval process given the ongoing rectification
and approvals process for the Company’s other plants.
In January 2017, the Company completed
the first brine water and natural gas well field construction in Sichuan Province and announced the commencement of trial production.
The Company has been working with Xinan Shiyou Daxue (Southwest Petroleum University) and developed a solution to DHCH’s
technical drilling problem. In resolving the problem, the Company purchased customized equipment for its natural gas project. The
installation of such equipment, including providing piping and electricity, was completed in July 2018. The Company is preparing
to test the equipment and anticipates to begin the trial production in the fourth quarter of 2018.
(c) Reclassifications
Certain reclassifications have been made
to periods in fiscal year 2017 amounts in the condensed consolidated statements of income to conform to the presentation in the
current periods in fiscal year 2018. These reclassifications did not impact the consolidated income (loss) from operations, net
income (loss) and comprehensive income (loss).
(d) Allowance
for Doubtful Accounts
As of September 30, 2018 and December 31,
2017, allowances for doubtful accounts were nil. No allowances for doubtful accounts were charged to the condensed consolidated
statements of income for the three-month and nine-month periods ended September 30, 2018 and 2017.
(e) Concentration
of Credit Risk
The Company is exposed to credit risk in
the normal course of business, primarily related to accounts receivable and cash and cash equivalents. Substantially all of the
Company’s cash and cash equivalents are maintained with financial institutions in the PRC, namely, Industrial and Commercial
Bank of China Limited, China Merchants Bank Company Limited and Sichuan Rural Credit Union, which are not insured or otherwise
protected. The Company placed $208,245,940 and $208,906,759 with these institutions as of September 30, 2018 and December 31, 2017,
respectively. The Company has not experienced any losses in such accounts in the PRC.
Concentrations of credit risk with respect
to accounts receivable exists as the Company sells a substantial portion of its products to a limited number of customers. However,
such concentrations of credit risks are limited since the Company performs ongoing credit evaluations of its customers’
financial condition and extends credit terms as and when appropriate. Approximately 100% and 13% of the balances of accounts receivable
as of September 30, 2018 and December 31, 2017, respectively, are outstanding for less than three months. All outstanding receivables
as of September 30, 2018 and December 31, 2017 are within the credit terms which range between 90 and 240 days. For the balances
of all accounts receivable as of September 30, 2018, 100% were collected in October 2018.
GULF RESOURCES, INC.
AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
SEPTEMBER 30, 2018
(Expressed in U.S. dollars)
(UNAUDITED)
NOTE 1 – BASIS OF PRESENTATION AND
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES – Continued
(f) Property,
Plant and Equipment ( including Oil and gas properties)
Property, plant and equipment are stated
at cost less accumulated depreciation and any impairment losses. Expenditures for new facilities or equipment, and major expenditures
for betterment of existing facilities or equipment are capitalized and depreciated using the straight-line method at rates sufficient
to depreciate such costs less 5% residual value over the estimated productive lives. All other ordinary repair and maintenance
costs are expensed as incurred.
Mineral rights are recorded at cost less
accumulated depreciation and any impairment losses. Mineral rights are amortized ratably over the term of the lease, or the equivalent
term under the units of production method, whichever is shorter.
Construction in process primarily represents
direct costs of construction of plant, machinery and equipment. Costs incurred are capitalized and transferred to property and
equipment upon completion, at which time depreciation commences.
The Company’s depreciation and amortization
policies on property, plant and equipment, other than mineral rights are as follows:
|
|
Useful life
(in years)
|
Buildings (including salt pans)
|
|
8 - 20
|
Plant and machinery (including protective shells, transmission channels and ducts)
|
|
3 - 8
|
Motor vehicles
|
|
5
|
Furniture, fixtures and equipment
|
|
3-8
|
Property, plant and equipment under the
capital lease are depreciated over the shorter of their expected useful lives or the remaining term of the lease.
Producing oil and gas properties are depreciated
on a unit-of-production basis over the proved developed reserves. Common facilities that are built specifically to service production
directly attributed to designated oil and gas properties are depreciated based on the proved developed reserves of the respective
oil and gas properties on a pro-rata basis. Common facilities that are not built specifically to service identified oil and gas
properties are depreciated using the straight-line method over their estimated useful lives. Costs associated with significant
development projects are not depreciated until commercial production commences and the reserves related to those costs are excluded
from the calculation of depreciation.
(g) Retirement
Benefits
Pursuant to the relevant laws and regulations
in the PRC, the Company participates in a defined contribution retirement plan for its employees arranged by a governmental organization.
The Company makes contributions to the retirement plan at the applicable rate based on the employees’ salaries. The required
contributions under the retirement plans are charged to the condensed consolidated statement of income on an accrual basis when
they are due. The Company’s contributions totaled $308,669 and $288,779 for the three-month period ended September 30, 2018
and 2017, respectively, and totaled $912,744 and $801,655 for the nine-month period ended September 30, 2018 and 2017, respectively.
(h) Revenue
Recognition
Net revenue is net of discount and value
added tax and comprises the sale of bromine, crude salt and chemical products. Revenue is recognized when the control of the promised
goods is transferred to the customers in an amount that reflects the consideration that the Company expects to receive from the
customers in exchange for those goods. The acknowledgement of receipt of goods by the customers is when control of the product
is deemed to be transferred. Invoicing occurs upon acknowledgement of receipt of the goods by the customers. Customers have no
rights to return the goods upon acknowledgement of receipt of goods.
GULF RESOURCES, INC.
AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
SEPTEMBER 30, 2018
(Expressed in U.S. dollars)
(UNAUDITED)
NOTE 1 – BASIS OF PRESENTATION AND
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES – Continued
(i) Recoverability
of Long-lived Assets
In accordance with Financial Accounting
Standards Board (“FASB”) Accounting Standards Codification (“ASC”) 360-10-35
“Impairment or Disposal
of Long-lived Assets”
, long-lived assets to be held and used are analyzed for impairment whenever events or changes in
circumstances indicate that the carrying amount of an asset may not be fully recoverable or that the useful lives of those assets
are no longer appropriate. The Company evaluates at each balance sheet date whether events and circumstances have occurred that
indicate possible impairment.
The Company determines the existence of
such impairment by measuring the expected future cash flows (undiscounted and without interest charges) and comparing such amount
to the carrying amount of the assets. An impairment loss, if one exists, is then measured as the amount by which the carrying amount
of the asset exceeds the discounted estimated future cash flows. Assets to be disposed of are reported at the lower of the carrying
amount or fair value of such assets less costs to sell. Asset impairment charges are recorded to reduce the carrying amount of
the long-lived asset that will be sold or disposed of to their estimated fair values. Charges for the asset impairment reduce the
carrying amount of the long-lived assets to their estimated salvage value in connection with the decision to dispose of such assets.
In the three and nine- month periods ended September 30, 2018, the Company recorded an impairment loss of $1,284,832 for the mineral
rights for factories No 3 and No 4 due to closure notice from the People's Government of Yangkou Town, Shouguang City and a write-off
of $112,481 for write-offs of certain wells and equipments damaged by flood from a typhoon during third quarter 2018.
For the three and nine months period ended
September 30, 2017, the Company determined that there were no events or circumstances indicating possible impairment of its long-lived
assets.
(j) Basic
and Diluted Earnings (Loss) per Share of Common Stock
Basic earnings per common share are based
on the weighted average number of shares outstanding during the periods presented. Diluted earnings per share are computed
using weighted average number of common shares outstanding during the period increased to include the number of additional shares
of common stock that would have been outstanding if the potentially dilutive outstanding stock options had been exercised. Potentially
dilutive outstanding stock options that would have the effect of increasing diluted earnings per share are considered to be anti-dilutive,
i.e. the exercise prices of the outstanding stock options are greater than the market price of the common stock. The number of
anti-dilutive outstanding stock options which were excluded from the calculation of diluted earnings was 259,590 and 41,944 for
the three-month period ended September 30, 2018 and 2017 respectively, and 141,629 and 35,366 for the nine-month period ended September
30, 2018 and 2017 respectively. These awards could be dilutive in the future if the market price of the common stock increases
and is greater than the exercise price of these awards.
GULF RESOURCES, INC.
AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
SEPTEMBER 30, 2018
(Expressed in U.S. dollars)
(UNAUDITED)
NOTE 1 – BASIS OF PRESENTATION AND
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES – Continued
(j) Basic
and Diluted Earnings (Loss) per Share of Common Stock – Continued
The following table sets forth the computation
of basic and diluted earnings per share:
|
|
Three-Month Period Ended September 30,
|
|
Nine-Month Period Ended September 30,
|
|
|
2018
|
|
2017
|
|
2018
|
|
2017
|
Numerator
|
|
|
|
|
|
|
|
|
Net income/(loss)
|
|
$
|
(19,493,034
|
)
|
|
$
|
3,425,640
|
|
|
$
|
(31,283,007
|
)
|
|
$
|
25,252,438
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic: Weighted-average common shares outstanding during the period
|
|
|
46,803,791
|
|
|
|
46,794,443
|
|
|
|
46,803,791
|
|
|
|
46,794,011
|
|
Add: Dilutive effect of stock options
|
|
|
—
|
|
|
|
103,552
|
|
|
|
—
|
|
|
|
39,019
|
|
Diluted
|
|
|
46,803,791
|
|
|
|
46,897,995
|
|
|
|
46,803,791
|
|
|
|
46,833,030
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income/(loss) per share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
(0.42
|
)
|
|
$
|
0.07
|
|
|
$
|
(0.67
|
)
|
|
$
|
0.54
|
|
Diluted
|
|
$
|
(0.42
|
)
|
|
$
|
0.07
|
|
|
$
|
(0.67
|
)
|
|
$
|
0.54
|
|
Due to the loss recorded for the three and nine-month periods
ended September 30, 2018, no incremental shares have been included in these periods because the effect would be anti-dilutive.
(k) Reporting
Currency and Translation
The financial statements of the Company’s
foreign subsidiaries are measured using the local currency, Renminbi (“RMB”), as the functional currency; whereas the
functional currency and reporting currency of the Company is the United States dollar (“USD” or “$”).
As such, the Company uses the “current
rate method” to translate its PRC operations from RMB into USD, as required under FASB ASC 830 “Foreign Currency Matters”.
The assets and liabilities of its PRC operations are translated into USD using the rate of exchange prevailing at the balance sheet
date. The capital accounts are translated at the historical rate. Adjustments resulting from the translation of the balance sheets
of the Company’s PRC subsidiaries are recorded in stockholders’ equity as part of accumulated other comprehensive income.
The statement of income and comprehensive income is translated at average rates during the reporting period. Gains or losses resulting
from transactions in currencies other than the functional currencies are recognized in net income for the reporting periods as
part of general and administrative expense. The statement of cash flows is translated at average rates during the reporting period,
with the exception of issuance of shares and payment of dividends which are translated at historical rates.
(l) Foreign
Operations
All of the Company’s operations and
assets are located in PRC. The Company may be adversely affected by possible political or economic events in this country. The
effect of these factors cannot be accurately predicted.
(m) Exploration
Costs
Exploration costs including the cost of
researching appropriate places to drill wells and the cost of well drilling in search of potential natural brine, are charged to
the income statement as incurred. Once the commercial viability of a project has been confirmed, all subsequent costs are capitalized.
For oil and gas properties, the successful
efforts method of accounting is adopted. The Company carries exploratory well costs as an asset when the well has found a sufficient
quantity of reserves to justify its completion as a producing well and where the Company is making sufficient progress assessing
the reserves and the economic and operating viability of the project. Exploratory well costs not meeting these criteria are charged
to expenses. Exploratory wells that discover potentially economic reserves in areas where major capital expenditure will be required
before production would begin and when the major capital expenditure depends upon the successful completion of further exploratory
work remain capitalized and are reviewed periodically for impairment.
(n) Goodwill
Goodwill represents the excess of the purchase
price over the net of the fair value of the identifiable tangible and intangible assets acquired and the fair value of liabilities
assumed in business acquisitions. Goodwill impairment is assessed based on qualitative factors to determine whether it is more
likely than not that the fair value of a reporting entity is less than its carrying amount, including goodwill. If the Company
determines that it is more likely than not that the fair value of a reporting entity is less than its carrying amount, the two-step
goodwill impairment test will be performed. The Company performs its impairment assessment annually and between annual tests in
certain circumstances and determined that the two-step goodwill impairment test is not required to be carried out as of September
30, 2018.
(o) New
Accounting Pronouncements
Recently Adopted Accounting Pronouncements
In May 2014 and April 2016, the FASB issued
ASU No. 2014-09 and ASU No. 2016-10, Revenue from Contracts with Customers (Topic 606). The core principle of the guidance is that
an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects
the consideration to which the entity expects to be entitled in exchange for those goods or services. In August 2015, FASB issued
ASU 2015-14, which deferred the effective date of Update 2014-09 to annual reporting periods beginning after December 15, 2017.
The Company adopted this Update as of January 1, 2018. This adoption did not have a material impact on the Company’s condensed
consolidated financial statements as of and for the three and nine months ended September 30, 2018 as the amount and timing of
all the Company’s revenue will continue to be recognized at a point in time. As required by the Update, the Company disclosed
its revenues from contracts with customers into disaggregated categories in Note 13.
In August 2016, the FASB issued ASU No.
2016-15, Statement of Cash Flows (Topic 230), Classification of Certain Cash Receipts and Cash Payments. The Update addresses eight
specific changes to how cash receipts and cash payments are presented and classified in the statement of cash flows. The amendments
in this Update are effective for public business entities for fiscal years beginning after December 15, 2017, and interim periods
within those fiscal years. Early adoption is permitted. An entity that elects early adoption must adopt all of the amendments in
the same period. The amendments in this Update should be applied using a retrospective transition method to each period presented.
If it is impracticable to apply the amendments retrospectively for some of the issues, the amendments for those issues would be
applied prospectively as of the earliest date practicable. The Company adopted this Update as of January 1, 2018 with no material
impact on the condensed consolidated financial statements as of and for the three and nine months ended September 30, 2018.
In May 2017, the FASB issued ASU No. 2017-09,
Compensation – Stock Compensation (Topic 718), Scope of Modification Accounting. The amendments in this Update provide guidance
about which changes to the terms or conditions of a share-based payment award require an entity to apply modification accounting.
The amendments in this Update are effective for all entities for annual periods, and interim periods within those annual periods,
beginning after December 15, 2017. The amendments in this Update should be applied prospectively to an award modified on or after
the adoption date. The Company adopted this Update as of January 1, 2018 with no material impact on the condensed consolidated
financial statements as of and for the three and nine months ended September 30, 2018.
Recently Issued Accounting Pronouncements
Not Yet Adopted
In February 2016, the FASB issued ASU No.
2016-02, Leases (Topic 842). The amendments in this Update specify the accounting for leases. The core principle of Topic 842 is
that a lessee should recognize the assets and liabilities that arise from leases. For public business entities, the amendments
in this Update are effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal
years.
The Company will adopt this ASU and related amendments on January
1, 2019 and expects to elect certain practical expedients permitted under the transition guidance. The Company will also elect
the optional transition method that allows for a cumulative-effect adjustment in the period of adoption and will not restate prior
periods’ financial statements. The Company continues to evaluate the effect of the adoption of this ASU on its consolidated
financial statements and related disclosure. Based on preliminary estimates, the Company expects the total assets and total liabilities
to increase upon the adoption of the ASU but does not expect the effect on its consolidated balance sheet to be material. The Company
does not expect adoption of the ASU to have a material effect on the consolidated statement of income.
In June 2016, the FASB issued ASU No. 2016-13,
Financial Instruments – Credit Losses (Topic 326), Measurement of Credit Losses on Financial Instruments. The amendments
in this Update affect loans, debt securities, trade receivables, and any other financial assets that have the contractual right
to receive cash. The ASU requires an entity to recognize expected credit losses rather than incurred losses for financial assets.
For public entities, the amendments are effective for fiscal years beginning after December 15, 2019, including interim periods
within those fiscal years. The Company is currently evaluating the effect of this on the consolidated financial statements and
related disclosure.
In January 2017, the FASB issued ASU No.
2017-04, Intangibles – Goodwill and Other (Topic 350), Simplifying the Test for Goodwill Impairment. To simplify the subsequent
measurement of goodwill, the Board eliminated Step 2 from the goodwill impairment test. Instead, under the amendments in this Update,
an entity should perform its annual, or interim, goodwill impairment test by comparing the fair value of a reporting unit with
its carrying amount. An entity should recognize an impairment charge for the amount by which the carrying amount exceeds the reporting
unit’s fair value; however, the loss recognized should not exceed the total amount of goodwill allocated to that reporting
unit. A public business entity that is a U.S. Securities and Exchange Commission (SEC) filer should adopt the amendments in this
Update for its annual or any interim goodwill impairment tests in fiscal years beginning after December 15, 2019. The Company is
currently evaluating effect of this on the consolidated financial statements and related disclosure.
In June 2018, the FASB issued ASU No.2018-07,
Compensation- Stock Compensation (Topic 718). Improvements to Nonemployee Share-Based Payment Accounting. The amendments in this
update expand the scope of Topic 718 to include share-based payment transactions for acquiring goods and services from nonemployees.
Prior to this update, Top 718 applied only to share-based transactions to employees. Consistent with the accounting requirements
for employee share-based payment awards, nonemployee share-based payment awards within the scope of Topic 718 are measured at grant-date
fair value of the equity instruments that an entity is obligated to issue when the good has been delivered or the service has been
rendered and any other conditions necessary to earn the right to benefit from the instruments have been satisfied. The amendments
in the Update are effective for public business entities form fiscal years beginning after December 15, 2018, including interim
periods within that fiscal year. Early adoption is permitted, but no earlier than an entity’s adoption date of Topic 606.
This is not expected to have a material effect on the Company’s consolidated financial statements.
GULF RESOURCES, INC.
AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
SEPTEMBER 30, 2018
(Expressed in U.S. dollars)
(UNAUDITED)
NOTE 2 – INVENTORIES
Inventories consist of:
|
|
September 30, 2018
|
|
December 31, 2017
|
|
|
|
|
|
Raw materials
|
|
$
|
—
|
|
|
$
|
396,482
|
|
Finished goods
|
|
|
65,021
|
|
|
|
844,224
|
|
Allowance for obsolete and slow-moving inventory
|
|
|
—
|
|
|
|
(43,921
|
)
|
|
|
$
|
65,021
|
|
|
$
|
1,196,785
|
|
NOTE 3 – PREPAID LAND LEASES
The Company prepaid its land leases with
lease terms for periods ranging from one to fifty years to use the land on which the production facilities and warehouses of the
Company are situated. The prepaid land lease is amortized on a straight line basis.
The Company paid $9,732,118 for a 50-year
lease of a parcel of land for the new factory at Bohai Marine Fine Chemical Industrial Park in December, 2017. The land use certificate
is being processed by the government and the commencement date of the lease will be known upon completion of the application process.
During the three and nine months period
ended September 30, 2018, amortization of prepaid land leases totaled $252,091 and $546,767, which amounts were recorded as direct
labor and factory overheads incurred during plant shutdown.
During the three-month period ended September
30, 2017, amortization of prepaid land leases totaled $488,848, of which $400,605 and $88,243 were recorded as cost of net revenue
and administrative expenses, respectively. During the nine-month period ended September 30, 2017, amortization of prepaid land
leases totaled $717,969, of which $629,727 and $88,243 were recorded as cost of net revenue and administrative expenses, respectively.
The Company has the rights to use certain
parcels of land located in Shouguang, PRC, through lease agreements signed with local townships or the government authority. For
parcels of land that are collectively owned by local townships, the Company cannot obtain land use rights certificates. The parcels
of land that the Company cannot obtain land use rights certificates cover a total of approximately 38.6 square kilometers with
an aggregate carrying value of $792,091 and approximately 54.97 square kilometers with an aggregate carrying value of $645,761
as at September 30, 2018 and December 31, 2017, respectively.
NOTE 4 – PROPERTY, PLANT AND EQUIPMENT, NET
Property, plant and equipment, net consist of the following:
|
|
September 30,
2018
|
|
December 31,
2017
|
At cost:
|
|
|
|
|
|
|
|
|
Mineral rights
|
|
$
|
4,475,677
|
|
|
|
4,711,822
|
|
Buildings
|
|
|
60,728,604
|
|
|
|
67,748,512
|
|
Plant and machinery
|
|
|
147,580,728
|
|
|
|
200,742,652
|
|
Motor vehicles
|
|
|
6,216
|
|
|
|
8,792
|
|
Furniture, fixtures and office equipment
|
|
|
3,281,560
|
|
|
|
4,150,588
|
|
Construction in process
|
|
|
1,306,671
|
|
|
|
183,036
|
|
Total
|
|
|
217,379,456
|
|
|
|
277,545,402
|
|
Less: Accumulated depreciation and amortization
|
|
|
(131,560,339
|
)
|
|
|
(163,597,407
|
)
|
Impairment
|
|
|
(18,951,023
|
)
|
|
|
(18,833,491
|
)
|
Net book value
|
|
$
|
66,868,094
|
|
|
$
|
95,114,504
|
|
The Company has certain buildings and salt
pans erected on parcels of land located in Shouguang, PRC, and such parcels of land are collectively owned by local townships or
the government. The Company has not been able to obtain property ownership certificates over these buildings and salt pans. The
aggregate carrying values of these properties situated on parcels of the land are $20,768,963 and $27,432,351 as at September 30,
2018 and December 31, 2017, respectively.
GULF RESOURCES, INC.
AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
SEPTEMBER 30, 2018
(Expressed in U.S. dollars)
(UNAUDITED)
NOTE 4 – PROPERTY, PLANT AND EQUIPMENT, NET – Continued
During the three-month period ended September
30, 2018, depreciation and amortization expense totaled $4,601,338, of which $4,353,824 and $247,514 were recorded in direct labor
and factory overheads incurred during plant shutdown and administrative expenses, respectively. During the nine-month period ended
September 30, 2018, depreciation and amortization expense totaled $13,974,456, of which $13,210,971 and $763,485 were recorded
in direct labor and factory overheads incurred during plant shutdown and administrative expenses, respectively.
During the three-month period ended September
30, 2017, depreciation and amortization expense totaled $5,155,187, of which $3,356,534 and $1,798,653 were recorded as cost of
net revenue and administrative expenses, respectively. During the nine-month period ended September 30, 2017, depreciation and
amortization expense totaled $15,814,006, of which $13,430,768 and $2,383,238 were recorded as cost of net revenue and administrative
expenses respectively.
NOTE 5 – PROPERTY, PLANT AND EQUIPMENT UNDER CAPITAL LEASES,
NET
Property, plant and equipment under capital leases, net consist
of the following:
|
|
September 30, 2018
|
|
December 31, 2017
|
At cost:
|
|
|
|
|
|
|
|
|
Buildings
|
|
$
|
119,627
|
|
|
$
|
125,939
|
|
Plant and machinery
|
|
|
2,188,408
|
|
|
|
2,314,196
|
|
Total
|
|
|
2,308,035
|
|
|
|
2,440,135
|
|
Less: Accumulated depreciation and amortization
|
|
|
(1,994,056
|
)
|
|
|
(1,947,897
|
)
|
Net book value
|
|
$
|
313,979
|
|
|
$
|
492,238
|
|
The above buildings erected on parcels
of land located in Shouguang, PRC, are collectively owned by local townships. The Company has not been able to obtain
property ownership certificates over these buildings as the Company could not obtain land use rights certificates on the underlying
parcels of land.
During the three-month period ended September
30, 2018 and 2017, depreciation and amortization expense totaled $64,874 and $77,527, respectively, which was recorded as cost
of net revenue. During the nine-month period ended September 30, 2018 and 2017, depreciation and amortization expense totaled $203,271
and $227,998, respectively, which was recorded as cost of net revenue.
NOTE 6 – ACCOUNTS PAYABLE AND ACCRUED
EXPENSES
Accounts payable and accrued expenses consist
of the following:
|
|
September 30,
|
|
December 31,
|
|
|
2018
|
|
2017
|
Salary payable
|
|
$
|
239,741
|
|
|
$
|
393,617
|
|
Social security insurance contribution payable
|
|
|
140,178
|
|
|
|
135,203
|
|
Other payables
|
|
|
417,816
|
|
|
|
503,263
|
|
Total
|
|
$
|
797,735
|
|
|
$
|
1,032,083
|
|
GULF RESOURCES, INC.
AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
SEPTEMBER 30, 2018
(Expressed in U.S. dollars)
(UNAUDITED)
NOTE 7 – RELATED PARTY TRANSACTIONS
During the three-month and nine-month periods
ended September 30, 2018, the Company borrowed $0 and $251,912, respectively, from Jiaxing Lighting Appliance Company Limited (Jiaxing
Lighting”), in which Mr. Ming Yang, a shareholder and the Chairman of the Company, has a 100% equity interest. There was
no balance owing to Jiaxing Lighting as of September 30, 2018.
On September 25, 2012, the Company purchased
five floors of a commercial building in the PRC, through SYCI, from Shandong Shouguang Vegetable Seed Industry Group Co., Ltd.
(the “Seller”) at a cost of approximately $5.7 million in cash, of which Mr. Ming Yang, the Chairman of the Company,
had a 99% equity interest in the Seller. During the first quarter of 2018, the Company entered into an agreement with the Seller,
a related party, to provide property management services for an annual amount of approximately $99,200 for five years from January
1, 2018 to December 31, 2022. The expense associated with this agreement for the three and nine months ended September 30, 2018
was approximately $23,000 and $72,000.
NOTE 8 – TAXES PAYABLE
Taxes payable consists of the following:
|
|
|
September 30,
|
|
December 31,
|
|
|
2018
|
|
2017
|
Natural resource tax
|
|
$
|
—
|
|
|
$
|
156,147
|
|
Land use tax payable
|
|
|
1,556,323
|
|
|
|
810,841
|
|
Other tax payables
|
|
|
—
|
|
|
|
74,604
|
|
Total
|
|
$
|
1,556,323
|
|
|
$
|
1,041,592
|
|
NOTE 9 – CAPITAL LEASE OBLIGATIONS
The components of capital lease obligations
are as follows:
|
Imputed
|
|
September 30,
|
|
December 31,
|
|
Interest rate
|
|
2018
|
|
2017
|
Total capital lease obligations
|
6.7%
|
|
$
|
2,225,208
|
|
|
$
|
2,507,201
|
|
Less: Current portion
|
|
|
|
(160,350
|
)
|
|
|
(203,206
|
)
|
Capital lease obligations, net of current portion
|
|
|
$
|
2,064,858
|
|
|
$
|
2,303,995
|
|
Interest expenses from capital lease obligations
amounted to $37,138 and $40,667 for the three-month period ended September 30, 2018 and 2017, respectively, which were charged
to the condensed consolidated statement of income. Interest expenses from capital lease obligations amounted to $123,352 and $123,795
for the nine-month period ended September 30, 2018 and 2017, respectively, which were charged to the condensed consolidated statement
of income.
NOTE 10 –EQUITY
During the annual general meeting held
on June 18, 2013, the shareholders of the Company approved the amendment to the Certificate of Incorporation to decrease the number
of the authorized shares of the Company’s common stock to 80,000,000. The Company filed an amended and restated Certificate
of Incorporation with the Secretary of the State of Delaware to decrease the number of authorized shares of the Company’s
common stock. Accordingly, 80,000,000 is disclosed as the authorized shares of the Company’s common stock in the consolidated
balance sheets as of September 30, 2018 and December 31, 2017.
|
(b)
|
Retained Earnings - Appropriated
|
In accordance with the relevant PRC regulations
and the PRC subsidiaries’ Articles of Association, the Company’s PRC subsidiaries are required to allocate a portion
of its profit after tax to the following reserve:
Statutory Common Reserve Funds
SCHC, SYCI and DCHC are required each year
to transfer at least 10% of the profit after tax as reported under the PRC statutory financial statements to the Statutory Common
Reserve Funds until the balance reaches 50% of the registered share capital. This reserve can be used to make up any
loss incurred or to increase share capital. Except for the reduction of losses incurred, any other application should
not result in this reserve balance falling below 25% of the registered capital. The Statutory Common Reserve Fund as of September
30, 2018 for SCHC, SYCI and DCHC is 46%, 14% and 0% of its registered capital respectively.
GULF RESOURCES, INC.
AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
SEPTEMBER 30, 2018
(Expressed in U.S. dollars)
(UNAUDITED)
NOTE 11 – STOCK-BASED COMPENSATION
Pursuant to the Company’s Amended
and Restated 2007 Equity Incentive Plan approved in 2011(“Plan”), the aggregate number of shares of the Company’s
common stock available for grant of stock options and issuance is 4,341,989 shares. On October 5, 2015, during the annual meeting
of the Company’s stockholders, the aggregate number of shares reserved and available for grant and issuance pursuant to the
Plan was increased to 10,341,989. As of September 30, 2018, the number of shares of the Company’s common stock available
for issuance under the Plan is 6,739,989.
The fair value of each option award is
estimated on the date of grant using the Black-Scholes option-pricing model. The risk free rate is based on the yield-to-maturity
in continuous compounding of the US Government Bonds with the time-to-maturity similar to the expected tenor of the option granted,
volatility is based on the annualized historical stock price volatility of the Company, and the expected life is based on the historical
option exercise pattern.
During the nine months ended September 30, 2018, there were
no options issued to employees or non-employees.
The following table summarizes all Company
stock option transactions between January 1, 2018 and September 30, 2018.
|
|
Number of Option
and Warrants
Outstanding and exercisable
|
|
Weighted- Average Exercise price of Option
and Warrants
|
|
Range of
Exercise Price per Common Share
|
Balance, January 1, 2018
|
|
|
|
808,500
|
|
|
$
|
1.61
|
|
|
|
$1.44 - $4.80
|
|
Expired
during the period ended
September
30, 2018
|
|
|
|
(25,000
|
)
|
|
$
|
2.31
|
|
|
|
$2.07-2.55
|
|
Balance, September 30, 2018
|
|
|
|
783,500
|
|
|
$
|
1.58
|
|
|
|
$1.44 - $4.80
|
|
GULF RESOURCES, INC.
AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
SEPTEMBER 30, 2018
(Expressed in U.S. dollars)
(UNAUDITED)
NOTE 11 – STOCK-BASED COMPENSATION
– Continued
|
|
Stock and Warrants Options Exercisable and Outstanding
|
|
|
|
|
|
|
Weighted Average
|
|
|
|
|
|
|
Remaining
|
|
|
Outstanding at September 30, 2018
|
|
Range of
Exercise Prices
|
|
Contractual Life
(Years)
|
Exercisable and outstanding
|
|
783,500
|
|
$1.44 - $4.80
|
|
2.45
|
The aggregate intrinsic value of options outstanding and exercisable
as of September 30, 2018 was $0.
NOTE 12 – INCOME TAXES
The Company utilizes the asset and liability
method of accounting for income taxes in accordance with FASB ASC 740-10.
(a) United
States (“US”)
Gulf Resources, Inc. may be subject to
the United States of America Tax laws at a tax rate of 21%. No provision for the US federal income taxes has been made as the Company
had no US taxable income for the three-month and nine-month periods ended September 30, 2018 and 2017, and management believes
that its earnings are permanently invested in the PRC.
On December 22, 2017, the Tax Cuts and
Jobs Act (“TCJA”) was enacted in law. With the new tax law, the corporation income tax rate is reduced from 35% to
21% and there is a one-time mandatory transition tax on accumulated foreign earnings. The Company computed this one-time mandatory
transition tax on accumulated foreign earnings to be approximately $5.4 million. However, as the Company has available US federal
net operating loss carry forwards and foreign tax credit to fully offset the mandatory inclusion of the accumulated foreign earnings,
no net tax liability arose from the inclusion of these accumulated foreign earnings.
(b) British
Virgin Islands (“BVI”)
Upper Class Group Limited, a subsidiary
of Gulf Resources, Inc., was incorporated in the BVI and, under the current laws of the BVI, it is not subject to tax on income
or capital gain in the BVI. Upper Class Group Limited did not generate assessable profit for the three-month and nine-month periods
ended September 30, 2018 and 2017.
(c) Hong
Kong
Hong Kong Jiaxing Industrial Limited, a
subsidiary of Upper Class Group Limited, was incorporated in Hong Kong and is subject to Hong Kong profits tax. The Company
is subject to Hong Kong taxation on its activities conducted in Hong Kong and income arising in or derived from Hong Kong. No
provision for profits tax has been made as the Company has no assessable income for the three-month and nine-month periods ended
September 30, 2018 and 2017. The applicable statutory tax rates for the three-month and nine-month periods ended September
30, 2018 and 2017 are 16.5%. There is no dividend withholding tax in Hong Kong.
(d) PRC
Enterprise income tax (“EIT”)
for SCHC, SYCI and DCHC in the PRC is charged at 25% of the assessable profits.
The operating subsidiaries SCHC, SYCI and
DCHC are wholly foreign-owned enterprises (“FIE”) incorporated in the PRC and are subject to PRC Local Income Tax Law.
The PRC tax losses may be carried forward to be utilized against future taxable profit for ten years for High-tech enterprises
and small and medium-sized enterprises of science and technology and for five years for other companies. Tax losses of the operating
subsidiaries of the Company may be carried forward for five years.
On February 22, 2008, the Ministry of Finance
(“MOF”) and the State Administration of Taxation (“SAT”) jointly issued Cai Shui [2008] Circular 1 (“Circular
1”). According to Article 4 of Circular 1, distributions of accumulated profits earned by a FIE prior to January 1, 2008
to foreign investor(s) in 2008 will be exempted from withholding tax (“WHT”) while distribution of the profit earned
by an FIE after January 1, 2008 to its foreign investor(s) shall be subject to WHT at 5% effective tax rate.
As of September 30, 2018 and December 31,
2017, the accumulated distributable earnings under the Generally Accepted Accounting Principles (GAAP”) of PRC that are subject
to WHT are $248,872,624 and $282,660,981, respectively. Since the Company intends to reinvest its earnings to further expand its
businesses in mainland China, its foreign invested enterprises do not intend to declare dividends to their immediate foreign holding
companies in the foreseeable future. Accordingly, as of September 30, 2018 and December 31, 2017, the Company has not recorded
any WHT on the cumulative amount of distributable retained earnings of its foreign invested enterprises that are subject to WHT
in China. As of September 30, 2018 and December 31, 2017, the unrecognized WHT are $11,453,529 and $14,133,049, respectively.
GULF RESOURCES, INC.
AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
SEPTEMBER 30, 2018
(Expressed in U.S. dollars)
(UNAUDITED)
NOTE 12 – INCOME TAXES – Continued
The Company’s income tax returns
are subject to the various tax authorities’ examination. The federal, state and local authorities of the United States may
examine the Company’s income tax returns filed in the United States for three years from the date of filing. The Company’s
US income tax returns since 2015 are currently subject to examination.
Inland Revenue Department of Hong Kong
(“IRD”) may examine the Company’s income tax returns filed in Hong Kong for seven years from date of filing.
For the years 2011 through 2017, HKJI did not report any taxable income. It did not file any income tax returns during these years
except for 2014. For companies which do not have taxable income, IRD typically issues notification to companies requiring them
to file income tax returns once in every four years. The tax returns for 2014 are currently subject to examination.
The components of the provision for income
tax expense (benefit) from continuing operations are:
|
|
Three-Month Period
Ended September 30,
|
|
Nine-Month Period
Ended September 30,
|
|
|
2018
|
|
2017
|
|
2018
|
|
2017
|
Current taxes – PRC
|
|
$
|
—
|
|
|
$
|
1,509,321
|
|
|
$
|
—
|
|
|
$
|
9,152,597
|
|
Deferred taxes – PRC
|
|
|
(7,181,521
|
)
|
|
|
—
|
|
|
|
(10,258,508
|
)
|
|
|
—
|
|
|
|
$
|
(7,181,521
|
)
|
|
$
|
1,509,321
|
|
|
$
|
(10,258,508
|
)
|
|
$
|
9,152,597
|
|
The effective income tax expenses (tax
benefit) differ from the PRC statutory income tax rate of 25% from continuing operations in the PRC as follows:
|
|
Three-Month Period
Ended September 30,
|
|
Nine-Month Period
Ended September 30,
|
Reconciliations
|
|
2018
|
|
2017
|
|
2018
|
|
2017
|
Statutory income tax rate
|
|
|
(25
|
%)
|
|
|
25
|
%
|
|
|
(25
|
%)
|
|
|
25
|
%
|
Non-deductible Non-taxable item
|
|
|
(2
|
%)
|
|
|
3
|
%
|
|
|
—
|
|
|
|
1
|
%
|
Change in valuation allowance - US federal net operating loss
|
|
|
—
|
|
|
|
3
|
%
|
|
|
—
|
|
|
|
1
|
%
|
Effective tax rate
|
|
|
(27
|
%)
|
|
|
31
|
%
|
|
|
(25
|
%)
|
|
|
27
|
%
|
Significant components of the Company’s
deferred tax assets and liabilities at September 30, 2018 and December 30, 2017 are as follows:
|
|
September 30,
|
|
December 31,
|
|
|
2018
|
|
2017
|
Deferred tax liabilities
|
|
$
|
—
|
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
Deferred tax assets:
|
|
|
|
|
|
|
|
|
Allowance for obsolete and slow-moving inventories
|
|
$
|
—
|
|
|
$
|
10,980
|
|
Impairment on property, plant and equipment
|
|
|
3,773,740
|
|
|
|
4,610,228
|
|
Exploration costs
|
|
|
1,809,857
|
|
|
|
1,905,347
|
|
Compensation costs of unexercised stock options
|
|
|
94,287
|
|
|
|
98,092
|
|
PRC tax losses
|
|
|
10,559,743
|
|
|
|
—
|
|
US federal net operating loss
|
|
|
83,400
|
|
|
|
—
|
|
Total deferred tax assets
|
|
|
16,321,027
|
|
|
|
6,624,647
|
|
Valuation allowance
|
|
|
(177,687
|
)
|
|
|
(98,092
|
)
|
Net deferred tax asset
|
|
$
|
16,143,340
|
|
|
$
|
6,526,555
|
|
GULF RESOURCES, INC.
AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
SEPTEMBER 30, 2018
(Expressed in U.S. dollars)
(UNAUDITED)
NOTE 12 – INCOME TAXES – Continued
The increase in valuation allowance for
each of the three-month periods ended September 30, 2018 and 2017 is $24,000 and $406,000, respectively.
The increase in valuation allowance for the nine-month period
ended September 30, 2018 is $79,595.
The increase in valuation allowance for the nine-month period
ended September 30, 2017 is $479,400.
There were no unrecognized tax benefits
and accrual for uncertain tax positions as of September 30, 2018 and December 31, 2017.
NOTE 13 – BUSINESS SEGMENTS
The Company has four reportable segments: bromine,
crude salt, chemical products and natural gas. The reportable segments are consistent with how management views the markets served
by the Company and the financial information that is reviewed by its chief operating decision maker.
An operating segment’s performance
is primarily evaluated based on segment operating income (loss), which excludes share-based compensation expense, certain corporate
costs and other income not associated with the operations of the segment. These corporate costs (income) are separately stated
below and also include costs that are related to functional areas such as accounting, treasury, information technology, legal,
human resources, and internal audit. The Company believes that segment operating income (loss), as defined above, is an appropriate
measure for evaluating the operating performance of its segments. All the customers are located in PRC.
Three-Month
Period Ended September 30, 2018
|
|
Bromine*
|
|
Crude
Salt*
|
|
Chemical
Products
|
|
Natural Gas
|
|
Segment
Total
|
|
Corporate
|
|
Total
|
Net revenue
(external customers)
|
|
$
|
—
|
|
|
$
|
343,080
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
343,080
|
|
|
$
|
—
|
|
|
$
|
343,080
|
|
Net revenue
(intersegment)
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Income (loss) from operations before income taxes(benefit)
|
|
|
(24,369,917
|
)
|
|
|
(2,611,203
|
)
|
|
|
(698,693
|
)
|
|
|
(32,079
|
)
|
|
|
(27,711,892
|
)
|
|
|
912,975
|
|
|
|
(26,798,917
|
)
|
Income taxes expense (benefit)
|
|
|
(4,774,432
|
)
|
|
|
(2,171,383
|
)
|
|
|
(235,706
|
)
|
|
|
—
|
|
|
|
(7,181,521
|
)
|
|
|
—
|
|
|
|
(7,181,521
|
)
|
Income (loss) from operations after
income taxes (benefit)
|
|
|
(19,595,485
|
)
|
|
|
(439,820
|
)
|
|
|
(462,987
|
)
|
|
|
(32,079
|
)
|
|
|
(20,530,371
|
)
|
|
|
912,975
|
|
|
|
(19,617,396
|
)
|
Total assets
|
|
|
119,939,092
|
|
|
|
39,297,116
|
|
|
|
175,343,915
|
|
|
|
1,903,319
|
|
|
|
336,483,442
|
|
|
|
16,927
|
|
|
|
336,500,369
|
|
Depreciation and amortization
|
|
|
3,948,751
|
|
|
|
600,912
|
|
|
|
116,549
|
|
|
|
—
|
|
|
|
4,666,212
|
|
|
|
—
|
|
|
|
4,666,212
|
|
Capital expenditures
|
|
|
936,598
|
|
|
|
142,529
|
|
|
|
—
|
|
|
|
—
|
|
|
|
1,079,127
|
|
|
|
—
|
|
|
|
1,079,127
|
|
Goodwill
|
|
|
—
|
|
|
|
—
|
|
|
|
27,902,709
|
|
|
|
—
|
|
|
|
27,902,709
|
|
|
|
—
|
|
|
|
27,902,709
|
|
Three-Month
Period Ended September 30, 2017
|
|
Bromine*
|
|
Crude
Salt*
|
|
Chemical
Products
|
|
Natural Gas
|
|
Segment
Total
|
|
Corporate
|
|
Total
|
Net revenue
(external customers)
|
|
$
|
9,549,777
|
|
|
$
|
2,054,729
|
|
|
$
|
12,235,885
|
|
|
$
|
—
|
|
|
$
|
23,840,391
|
|
|
$
|
—
|
|
|
$
|
23,840,391
|
|
Net revenue
(intersegment)
|
|
|
1,216,406
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
1,216,406
|
|
|
|
—
|
|
|
|
1,216,406
|
|
Income from operations before income taxes
|
|
|
2,257,069
|
|
|
|
497,783
|
|
|
|
3,176,458
|
|
|
|
(33,184
|
)
|
|
|
5,898,126
|
|
|
|
(1,062,874
|
)
|
|
|
4,835,252
|
|
Income taxes
|
|
|
564,267
|
|
|
|
117,494
|
|
|
|
827,560
|
|
|
|
—
|
|
|
|
1,509,321
|
|
|
|
—
|
|
|
|
1,509,321
|
|
Income from operations after
income taxes
|
|
|
1,692,802
|
|
|
|
380,289
|
|
|
|
2,348,898
|
|
|
|
(33,184
|
)
|
|
|
4,388,805
|
|
|
|
(1,062,874
|
)
|
|
|
3,325,931
|
|
Total assets
|
|
|
161,722,622
|
|
|
|
36,586,589
|
|
|
|
202,404,825
|
|
|
|
1,815,010
|
|
|
|
402,529,046
|
|
|
|
40,136
|
|
|
|
402,569,182
|
|
Depreciation and amortization
|
|
|
3,556,296
|
|
|
|
765,183
|
|
|
|
911,235
|
|
|
|
—
|
|
|
|
5,232,714
|
|
|
|
—
|
|
|
|
5,232,714
|
|
Capital expenditures
|
|
|
466,636
|
|
|
|
95,864
|
|
|
|
—
|
|
|
|
1,260
|
|
|
|
563,760
|
|
|
|
—
|
|
|
|
563,760
|
|
Goodwill
|
|
|
—
|
|
|
|
—
|
|
|
|
28,920,005
|
|
|
|
—
|
|
|
|
28,920,005
|
|
|
|
—
|
|
|
|
28,920,005
|
|
GULF RESOURCES, INC.
AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
SEPTEMBER 30, 2018
(Expressed in U.S. dollars)
(UNAUDITED)
NOTE 13 – BUSINESS SEGMENTS – Continued
Nine-Month
Period Ended September 30, 2018
|
|
Bromine*
|
|
Crude
Salt*
|
|
Chemical
Products
|
|
Natural Gas
|
|
Segment
Total
|
|
Corporate
|
|
Total
|
Net revenue
(external customers)
|
|
$
|
—
|
|
|
$
|
1,981,573
|
|
|
$
|
613,368
|
|
|
$
|
—
|
|
|
$
|
2,594,941
|
|
|
$
|
—
|
|
|
$
|
2,594,941
|
|
Net revenue
(intersegment)
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Income (loss) from operations before income taxes (benefit)
|
|
|
(35,537,744
|
)
|
|
|
(5,150,679
|
)
|
|
|
(2,101,059
|
)
|
|
|
(113,029
|
)
|
|
|
(42,902,511
|
)
|
|
|
975,007
|
|
|
|
(41,927,504
|
)
|
Income taxes expense (benefit)
|
|
|
(7,745,098
|
)
|
|
|
(2,613,721
|
)
|
|
|
100,311
|
|
|
|
—
|
|
|
|
(10,258,508
|
)
|
|
|
—
|
|
|
|
(10,258,508
|
)
|
Income (loss) from operations after
income taxes (benefit)
|
|
|
(27,792,646
|
)
|
|
|
(2,536,958
|
)
|
|
|
(2,201,370
|
)
|
|
|
(113,029
|
)
|
|
|
(32,644,003
|
)
|
|
|
975,007
|
|
|
|
(31,668,996
|
)
|
Total assets
|
|
|
119,939,092
|
|
|
|
39,297,116
|
|
|
|
175,343,915
|
|
|
|
1,903,319
|
|
|
|
336,483,442
|
|
|
|
16,927
|
|
|
|
336,500,369
|
|
Depreciation and amortization
|
|
|
11,686,782
|
|
|
|
2,125,762
|
|
|
|
365,183
|
|
|
|
—
|
|
|
|
14,177,727
|
|
|
|
—
|
|
|
|
14,177,727
|
|
Capital expenditures
|
|
|
8,843,486
|
|
|
|
1,345,783
|
|
|
|
1,192,963
|
|
|
|
30,616
|
|
|
|
11,412,848
|
|
|
|
—
|
|
|
|
11,412,848
|
|
Goodwill
|
|
|
—
|
|
|
|
—
|
|
|
|
27,902,709
|
|
|
|
—
|
|
|
|
27,902,709
|
|
|
|
—
|
|
|
|
27,902,709
|
|
Nine-Month
Period Ended September 30, 2017
|
|
Bromine*
|
|
Crude
Salt*
|
|
Chemical
Products
|
|
Natural Gas
|
|
Segment
Total
|
|
Corporate
|
|
Total
|
Net revenue
(external customers)
|
|
$
|
41,895,304
|
|
|
$
|
6,390,390
|
|
|
$
|
55,875,179
|
|
|
$
|
—
|
|
|
$
|
104,160,873
|
|
|
$
|
—
|
|
|
$
|
104,160,873
|
|
Net revenue
(intersegment)
|
|
|
6,305,642
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
6,305,642
|
|
|
|
—
|
|
|
|
6,305,642
|
|
Income (loss) from operations before income taxes
|
|
|
17,269,984
|
|
|
|
2,434,872
|
|
|
|
16,441,115
|
|
|
|
(90,471
|
)
|
|
|
36,055,500
|
|
|
|
(1,924,779
|
)
|
|
|
34,130,721
|
|
Income taxes
|
|
|
4,358,455
|
|
|
|
586,240
|
|
|
|
4,207,902
|
|
|
|
—
|
|
|
|
9,152,597
|
|
|
|
—
|
|
|
|
9,152,597
|
|
Income (loss) from operations after
income taxes
|
|
|
12,911,529
|
|
|
|
1,848,632
|
|
|
|
12,233,213
|
|
|
|
(90,471
|
)
|
|
|
26,902,903
|
|
|
|
(1,924,779
|
)
|
|
|
24,978,124
|
|
Total assets
|
|
|
161,722,622
|
|
|
|
36,586,589
|
|
|
|
202,404,825
|
|
|
|
1,815,010
|
|
|
|
402,529,046
|
|
|
|
40,136
|
|
|
|
402,569,182
|
|
Depreciation and amortization
|
|
|
11,349,477
|
|
|
|
1,843,856
|
|
|
|
2,848,670
|
|
|
|
—
|
|
|
|
16,042,003
|
|
|
|
—
|
|
|
|
16,042,003
|
|
Capital expenditures
|
|
|
466,636
|
|
|
|
95,864
|
|
|
|
61,235
|
|
|
|
—
|
|
|
|
623,735
|
|
|
|
—
|
|
|
|
623,735
|
|
Goodwill
|
|
|
—
|
|
|
|
—
|
|
|
|
28,920,005
|
|
|
|
—
|
|
|
|
28,920,005
|
|
|
|
—
|
|
|
|
28,920,005
|
|
* Common production overheads, operating
and administrative expenses and asset items (mainly cash and certain office equipment) of bromine and crude salt segments in SCHC
were split by reference to the average selling price and production volume of respective segment.
|
|
Three-Month Period
Ended September 30,
|
|
Nine-Month Period
Ended September 30,
|
Reconciliations
|
|
2018
|
|
2017
|
|
2018
|
|
2017
|
Total segment operating income(loss)
|
|
$
|
(27,711,892
|
)
|
|
$
|
5,898,126
|
|
|
$
|
(42,902,511
|
)
|
|
$
|
36,055,500
|
|
Corporate costs
|
|
|
(116,254
|
)
|
|
|
(526,421
|
)
|
|
|
(399,308
|
)
|
|
|
(784,416
|
)
|
Unrealized gain/(loss) on translation of intercompany balance
|
|
|
1,029,229
|
|
|
|
(536,453
|
)
|
|
|
1,374,315
|
|
|
|
(1,140,363
|
)
|
Income(loss) from operations
|
|
|
(26,798,917
|
)
|
|
|
4,835,252
|
|
|
|
(41,927,504
|
)
|
|
|
34,130,721
|
|
Other income, net of expense
|
|
|
124,362
|
|
|
|
99,709
|
|
|
|
385,989
|
|
|
|
274,314
|
|
Income(loss) before income taxes
|
|
$
|
(26,674,555
|
)
|
|
$
|
4,934,961
|
|
|
$
|
(41,541,515
|
)
|
|
$
|
34,405,035
|
|
GULF RESOURCES, INC.
AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
SEPTEMBER 30, 2018
(Expressed in U.S. dollars)
(UNAUDITED)
NOTE 13 – BUSINESS SEGMENTS – Continued
The following table shows the major customer(s)
(10% or more) for the three-month period ended September 30, 2018.
Number
|
|
Customer
|
|
Bromine
(000’s)
|
|
Crude Salt
(000’s)
|
|
Chemical Products
(000’s)
|
|
Total
Revenue
(000’s)
|
|
Percentage of
Total
Revenue (%)
|
1
|
|
Shandong Morui Chemical Company Limited
|
|
$
|
—
|
|
|
$
|
122
|
|
|
$
|
—
|
|
|
$
|
122
|
|
|
|
35
|
%
|
2
|
|
Shandong Brother Technology Limited, Kuerle Xingdong Trading Limited
|
|
$
|
—
|
|
|
$
|
112
|
|
|
$
|
—
|
|
|
$
|
112
|
|
|
|
33
|
%
|
3
|
|
Shouguang Weidong Chemical Company Limited
|
|
$
|
—
|
|
|
$
|
109
|
|
|
$
|
—
|
|
|
$
|
109
|
|
|
|
32
|
%
|
The following table shows the major customer(s)
(10% or more) for the nine-month period ended September 30, 2018.
Number
|
|
Customer
|
|
Bromine
(000’s)
|
|
Crude Salt
(000’s)
|
|
Chemical Products
(000’s)
|
|
Total
Revenue
(000’s)
|
|
Percentage of
Total
Revenue (%)
|
1
|
|
Shandong Morui Chemical Company Limited
|
|
$
|
—
|
|
|
$
|
656
|
|
|
$
|
155
|
|
|
$
|
811
|
|
|
|
31
|
%
|
2
|
|
Shandong Brother Technology Limited, Kuerle Xingdong Trading Limited
|
|
$
|
—
|
|
|
$
|
783
|
|
|
$
|
—
|
|
|
$
|
783
|
|
|
|
30
|
%
|
3
|
|
Shouguang Weidong Chemical Company Limited
|
|
$
|
—
|
|
|
$
|
543
|
|
|
$
|
—
|
|
|
$
|
543
|
|
|
|
21
|
%
|
The following table shows the major customer(s)
(10% or more) for the three-month period ended September 30, 2017.
Number
|
|
Customer
|
|
Bromine
(000’s)
|
|
Crude Salt
(000’s)
|
|
Chemical Products
(000’s)
|
|
Total
Revenue
(000’s)
|
|
Percentage of
Total Revenue (%)
|
1
|
|
Shandong Morui Chemical Company Limited
|
|
$
|
1,938
|
|
|
$
|
809
|
|
|
$
|
695
|
|
|
$
|
3,442
|
|
|
|
14.4
|
%
|
The following table shows the major customer(s)
(10% or more) for the nine-month period ended September 30, 2017.
Number
|
|
Customer
|
|
Bromine
(000’s)
|
|
Crude Salt
(000’s)
|
|
Chemical Products
(000’s)
|
|
Total
Revenue
(000’s)
|
|
Percentage of
Total Revenue (%)
|
1
|
|
Shandong Morui Chemical Company Limited
|
|
$
|
7,643
|
|
|
$
|
2,059
|
|
|
$
|
3,463
|
|
|
$
|
13,165
|
|
|
|
12.6
|
%
|
NOTE 14 – CUSTOMER CONCENTRATION
The Company sells a substantial portion
of its products to a limited number of customers. During the three-month and nine-month periods ended September 30, 2018, the
Company sold 100% and 90% of its products to its top five customers, respectively. As of September 30, 2018, amounts due from
these customers were $396,494. During the three-month and nine-month periods ended September 30, 2017, the Company sold 36.0%
and 35.2% of its products to its top five customers, respectively. As of September 30, 2017, amounts due from these customers
were $39,124,728. This concentration makes the Company vulnerable to a near-term severe impact, should the relationships be terminated.
GULF RESOURCES, INC.
AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
SEPTEMBER 30, 2018
(Expressed in U.S. dollars)
(UNAUDITED)
NOTE 15 – MAJOR SUPPLIERS
During the nine-month period ended September
30, 2018, the Company did not purchase any raw materials. During the three-month and nine-month periods ended September 30, 2017,
the Company purchased 71.6% and 68.2% of its raw materials from its top five suppliers, respectively. As of September
30, 2017, amounts due to those suppliers included in accounts payable were $1,353,182.
NOTE 16 – FAIR VALUE OF FINANCIAL
INSTRUMENTS
The carrying values of financial instruments, which consist
of cash, accounts receivable and accounts payable and other payables, approximate their fair values due to the short-term nature
of these instruments. There were no material unrecognized financial assets and liabilities as of September 30, 2018
and December 31, 2017.
NOTE 17 – CAPITAL COMMITMENT AND
OPERATING LEASE COMMITMENTS
As of September 30, 2018, the Company leased
real property adjacent to Factory No. 1, with the related production facility, channels and ducts, other production equipment and
the buildings located on the property, under
a
capital lease. The
future minimum lease payments required under the capital lease, together with the present value of such payments, are included
in the table shown below.
The Company has leased eight parcels of
land under non-cancelable operating leases, with fixed rentals and expire through, December 2021, December 2023, December 2030,
April 2038, December 2040, February 2059, August 2059 and June 2060, respectively. The remaining lease obligations of lease agreements
related to the factories that were not allowed to resume production as required by the government (See Note 1 (b)) were excluded
from the Operating Lease Obligations below as the lease agreements are considered terminated.
The following table sets forth the Company’s
contractual obligations as of September 30, 2018:
|
|
Capital Lease Obligations
|
|
Operating Lease Obligations
|
|
Property Management Fees
|
|
Capital Expenditure
|
Payable within:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
the next 12 months
|
|
$
|
272,859
|
|
|
$
|
773,194
|
|
|
$
|
90,691
|
|
|
$
|
38,302
|
|
the next 13 to 24 months
|
|
|
272,859
|
|
|
|
783,710
|
|
|
|
90,691
|
|
|
|
—
|
|
the next 25 to 36 months
|
|
|
272,859
|
|
|
|
797,622
|
|
|
|
90,691
|
|
|
|
—
|
|
the next 37 to 48 months
|
|
|
272,859
|
|
|
|
646,218
|
|
|
|
90,691
|
|
|
|
—
|
|
the next 49 to 60 months
|
|
|
272,859
|
|
|
|
653,170
|
|
|
|
90,691
|
|
|
|
—
|
|
thereafter
|
|
|
1,910,020
|
|
|
|
12,253,841
|
|
|
|
—
|
|
|
|
—
|
|
Total
|
|
$
|
3,274,315
|
|
|
$
|
15,907,755
|
|
|
$
|
453,455
|
|
|
$
|
38,302
|
|
Less: Amount representing interest
|
|
|
(1,049,107
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Present value of net minimum lease payments
|
|
$
|
2,225,208
|
|
|
|
|
|
|
|
|
|
|
|
|
|
GULF RESOURCES, INC.
AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
SEPTEMBER 30, 2018
(Expressed in U.S. dollars)
(UNAUDITED)
NOTE 17 – CAPITAL COMMITMENT AND
OPERATING LEASE COMMITMENTS – Continued
Rental expenses related to operating leases
of the Company which were charged to the condensed consolidated statements of income (loss) amounted to $266,875 and $264,113 for
the three months ended September 30, 2018 and 2017, respectively. Rental expenses related to operating leases of the Company which
were charged to the condensed consolidated statements of income (loss) amounted to $831,540 and $775,680 for the nine months ended
September 30, 2018 and 2017, respectively.
NOTE 18 – SUBSEQUENT EVENTS
On October 4, 2018, the Company signed
a bromine well reconstruction contract with a total contract amount of approximately $5.9 million to replace damaged wells caused
by flooding from a typhoon that hit the Shandong Province of PRC in August 2018. The Company also signed a maintenance contract
on October 4, 2018 with a total contract amount of approximately $2.6 million to repair damaged aqueduct, halogen reservoirs, and
roads caused by the floods.
On October 17, 2018, the Company signed
a one-time land compensation agreement of approximately $0.2 million for the construction of wastewater discharge channels of bromine
factory Number 10.
On October 22, 2018, the Company signed
the wastewater drainage and treatment project contract with a total contract amount of approximately $5.1 million. It
mainly provides additional wastewater treatment for the Company's factory Number 1, Number 2 and Subdivision of Factory Number
1.
On October 31, 2018, the Company signed the wastewater drainage and treatment project contract with a total contract amount of
approximately $0.81 million. It mainly provides wastewater treatment for the Company's factory Number 10.